Fed’s 75 Point Interest Rate Hike Raises Fears of Recession, Market Volatility

U.S. Federal Reserve’s 75 basis points rate hike, its biggest in nearly three decades, increases investor worries over recession and more volatile trading after their hopes of a soft landing for the U.S. economy is becoming more difficult. Both analysts and investors said they think a recession is more likely after the Fed hiked rates by 75 points and committed to bring more moves to fight inflation.

The stocks went up hoping that the Fed will go all out in fighting the worst inflation in over 40 years. But not many people believe that deep selloffs in equities will be near a turning point until there are clear signs inflation is dropping. The S&P is down 22.2% year-to-date and is in a bear market.

As analysts and investors believe the volatility to remain high, market participants will take less risks in general.

In addition to the rate hike, the Fed also downgraded its economic outlook, with growth now expected to slow down to a 1.7% this year. It remains to be seen whether the Fed will hit a “hard landing” by putting the economy into recession as it hikes rates, or dampen inflation while slowing growth, meaning a “soft landing.”

Although Fed officials signaled a faster path of rate hikes to come and another 75 point increase at the central bank’s next meeting is possible, Fed Chair Powell said such a move would not be common.

Not everyone shares the confidence of Powell, who thinks that policymakers could engineer a soft landing. Many banks have warned that a recession risk is rising.

Recession risks could prompt the Fed to reverse course. More hawkish monetary policies comes at an economic cost and that could mean rate cuts to be on the agenda for summer 2023.

A recession could mean more pain for an already-battered stock market. Bear markets accompanied by recession tend to be longer and steeper, with a median decline of about 35%.

If recession occurs later this year or early next year, earnings would decline on equities and stocks would probably go down further.

Fed policymakers had signaled half point hikes would be likely for June and July meetings with a deceleration starting September. But market expectations changed after annual U.S. consumer prices increased their highest in over 40 years.

The Fed has faced criticism from some investors for acting too slowly in taming inflation, or being behind-the-curve.

The S&P 500 rose 1.45% on Wednesday in what some investors said was a vote of confidence for a central bank that showed it was committed to taking decisive action against stubbornly high inflation.

Some have questioned how long that optimism would last.

Economic weakness and continued volatility in stocks could drive up a rally in government bonds, which some investors said were starting to present buying opportunities given how much they sold off this year.

Benchmark 10-year Treasury yields, which move inversely to the bond prices, have more than doubled since the beginning of the year, but they tumbled on Wednesday.

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